Benchmark hike signals hard times ahead

Benchmark hike signals hard times ahead

If there was any doubt that the housing market is correcting itself, the Bank of Canada’s hiked benchmark rate should dispel that disbelief.

Following hikes across the Big Six, the Bank of Canada’s benchmark rate increased from 5.14% to 5.34%, and according to Mortgages of Canada founder and CEO Samantha Brookes, home buyers and sellers are in for a bumpy ride.

“I do think the housing market will continue to correct and adjust the prices,” she told Mortgagebrokernews.ca. “Homebuyers’ buying power has been decreased even more, so those who are selling will have to bring their prices down to get a sale. The market is just correcting, so this is to be expected. Until the rate gets to where the government and banks feel the rates need to be—I truly believe it will be in the 5% or 5.5% range—rates will continue increasing.”

Brookes says monolines haven’t raised their benchmarks, which is good news for brokers trying to find their clients some relief.

“I didn’t see the benchmark coming; I didn’t see the hikes coming with TD and RBC,” she said. “However, the monolines haven’t moved their benchmark, so that’s good news for brokers because we can still qualify clients at 5.14%.”

Brookes estimates that, with the latest hike, 10-15% of buyers are out of the market.

I’d say the benchmark will take about 10 to 15% out.

On the East Coast, however, the benchmark hike will have a nominal impact.

“I think it will impact about 5% of buyers, and those were the people who were barely scraping into the market already,” said Clinton Wilkins of Centum Home Lenders Ltd. “With the people remaining in the market, they qualify for less, so they’ll buy something less expensive. Our real estate prices are lower, and overall, there are more people who are buying starter homes now than before because in Halifax there’s not a lot of inventory on the market. There was a time when the first-time buyer was buying luxury, but now they’re buying entry-level starter homes. With the stress test and the benchmark rate increasing to 5.34%, it will drive them to cheaper real estate, if they can qualify for anything at all.”

Brookes has a theory about the stress test: It will be rescinded in a few years when the correction is complete.

“It may be a few years down the line that they get rid of stress test, but they can’t leave it in place,” she said. “If they go to 5.5%, even on the alternative side, it takes 7.5% to qualify. If it goes up to 6%, then it’s 8%. People won’t be able to afford their home.”